Afford Anything - Are We Heading for a Housing Crash in 2022?

Episode Date: October 11, 2021

#343: The real estate market in 2021 has been bonkers. That’s the technical term. From 2012 to 2020, home prices nationwide rose at an annualized average of 5.8 percent per year. From April 2020 to April 2021, home prices climbed 17.2 percent. This sudden surge in prices has many homeowners and would-be investors fearful of a crash. The memories of the stark price run-up prior to The Great Recession are all too salient. What goes up must come down, right? Not exactly. In this episode, we walk through market fundamentals — discussing housing supply, lumber prices, and the distinction between cheap credit vs easy credit — to illustrate how today’s market is unlike anything we’ve ever seen. More importantly, we offer tips for everyone —whether you’re a renter looking to get into your starter home, an empty-nester looking to downsize, an owner-occupant who wants to lock in your gains, or a curious aspiring investor who wonders if it’s too late. Enjoy! For more information, visit the show notes at https://affordanything.com/episode343 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything. You just can't afford everything. Every choice that you make is a trade-off against something else. And that doesn't just apply to your money. That applies to any limited resource that you need to manage. It applies to how you budget your time, where you direct your energy. It applies to the select few things that you can focus on and to the people, events, and ideas that capture your attention. In all of these domains, pursuing one direction comes at the cost of the cost of, all other opportunities. Time, focus, attention, and energy, like money, are scarce resources. And that opens up two questions. First, what matters most? Sounds like an easy question on the surface, but it takes a lifetime to learn and iterate the answer. So that's the first question. The second question is how do you align that which matters most with your actions? How do you align it with your decision making. That's the real challenge, and that is what this podcast is here to explore and facilitate. My name is Paula Pan. I'm the host of the Afford Anything podcast. In today's episode, we're going to talk about one of the biggest spending decisions in your life,

which is housing. Today's episode, we're going to cover the housing market, and we will aim this episode at both owner occupants, meaning you buy a home for yourself to live in for your personal consumption, as well as real estate investors or aspiring real estate investors. So the information presented in this episode will apply to all parties, regardless of whether you're looking for a place to live or a place to grow your money. We're going to talk about the absolutely nutty housing market in 2021. The post-pandemic housing market is bonkers. That's a technical term.

So we're going to discuss, number one, why that is. And number two, what that means for you? Whether you're currently a renter and you're contemplating whether or not you should buy your first starter home, or whether you're currently a homeowner and you're contemplating if you should sell right now to capture the top, or go on a buying spree and buy a few more, whatever you're contemplating, you're going to find some clarity by the end of this episode. Now, before we get into the meat of today's episode, I have one announcement that is very near and dear to my heart, and it is that I spent

three years building a course on real estate investing, and then I spent another two and a half years with my team iterating it and improving it after going through each cohort of students. And so after five and a half years of development, we have an incredibly robust, comprehensive A through Z course that will help you figure out if real estate. investing is right for you because you certainly don't want to figure it out by like trying it and then realizing that it's not for you and oops now you've got a house that's a six figure mistake so this course will help you figure out whether or not it's right for you and if it is it will give you a lifetime's worth of guidance resources community support so that you can

become a real estate investor from a place of knowledge and confidence this course is only open for enrollment this week. We close our doors on Thursday, October 14 at 11.59 p.m. Pacific. So if you want all of the information that would have spared me from incredibly expensive mistakes if I had just known it when I was starting out, if you want the benefit of all of that, all of the tools, the resources, the knowledge, the wisdom, the support, the structure, the framework, the step-by-step guidance. If you want all of that, you have until Thursday, October 14, to enroll. That's our deadline. We close the doors at that time, and they're going to remain closed for another five or six months. So afford-anything.com slash enroll is the place to go. That's afford-anything.com slash enroll.

It's a beautiful page, by the way. Just go there and check it out. It's freaking gorgeous. Very, very proud of that page. I've never been so proud of a web page before. But it's truly a work of art. So if nothing else, just go check out that page. Affordanything.com slash enroll. Okay, with that said, let's talk about the topic of today's episode. First of all, let's use some facts and figures to establish the obvious, which is that home prices have been soaring at a rate that is a historical aberration. So to put some numbers to this, from 2012 until 2020,

home prices nationwide rose on average 5.8% annually. That is, over the past decade, in the recovery of the Great Recession, that's the growth rate that we all got accustomed to seeing. From April 2020 until April 2021, home prices grew over 17% during that 12-month period. So if you're already an owner, congratulations, drinks are on you tonight. And if you're currently a renter who is hoping to one day own, then all I can say is, now the fact that home prices grew 17.2% in a 12-month period

has many people feeling anxious, worried, afraid. There are some who are wanting to buy, either as owner occupants or as investors, but they're afraid, maybe you resonate with this, maybe you're afraid of buying at the top of the market. There are others who are home owners already and who are contemplating whether or not they should sell again because they're worried, and maybe you resonate with this too. I keep saying they. Maybe you are worried that if you don't sell right now, you'll miss being able to capture the top of the market. You'll miss the opportunity to turn your equity into a paper gain and lock in those gains. Both of those fears presuppose a crash. If you're a homeowner who thinks that you need to sell in order to lock in your gains,

then you're presupposing that in the future prices will be lower than they are today. Similarly, if you are not yet an owner, or if you have aspirations of owning more than you currently do, but you're sitting on the sidelines waiting for prices to fall, well, again, that's the anticipation of a crash. So let's talk about how likely that is, and in order to establish that, let's first look at why prices have run up. Now, as I mentioned, from 2012 until 2020, home prices rose 5.8% annually. This is just slightly higher than the trailing several decades worth of the K. Schiller Home Price Index, which reflect that home prices over the past century have risen at about 5% per year. So this 5.8% that we saw in the last decade is nominally a little bit higher than the historic rate of 5%.

That's the rate of growth over a long-term annualized average across multiple decades. This past decade was a little bit better, but not remarkably so. And most real estate analysts expect that in 2022, the growth rate of housing will revert back to the mean. Freddie Mac, which is a government-sponsored home loan entity, projects home prices to revert back to 5.3% growth levels in the year 2022. They published a forecast on July 15, 2021, with the compelling title, quote, housing market expected to remain strong despite major supply shortage and historically high house prices across the U.S. slowing sales. Within this report, which we'll link to in the show notes, they state that while the U.S. added 850,000 non-farm payroll jobs in the month of June, 2021, we as a nation, are still down. 6.8 million jobs from where we were in February 2020. And as the economy continues to reopen, post-pandemic, more job openings will be filled, qualifying more buyers to enter the market.

Currently, job openings have surged to a record high of 9.2 million, meaning that there's currently a severe labor shortage across the U.S. and as more people begin filling those jobs, the velocity of money, which is the speed at which money changes hands and is an important indicator of economic health, that velocity of money will increase. This creates wealth, which in turn enables individuals to enter the housing market. This report, again, comes from Freddie Mac, which is a government-sponsored entity. There are also many private companies, private analysts who have published their own reports, and their reports are quite similar. multiple independent third-party analysts have all projected that home prices are likely to revert back to the mean,

meaning likely to go back to 5.x percent growth, 5.3, 5.4. You know, people are splitting hairs, 5.1 what? But there's wide consensus that it's going to be in the 5 percent, between 5 percent to 6 percent range, moving forward. And so that opens up the question, why was 2020? so different. Why was it that from April 2020 to April 2021 prices skyrocketed 17.2%? Because many people have a fear of heights. Many people understandably are scarred from the memories of the Great Recession. We recall home prices soaring in the year 2006 only to crater soon afterwards and a host of cognitive biases, such as recency bias, the availability heuristic, all of the cognitive biases that cause us to overweight what is salient and underweight what is not. All of those are kicking in

hardcore. No one wants to be left holding the bag if the market were to tumble in the way that it did in 2007-2008. So let's talk about why home prices shot up so much. In fact, let's zoom out and talk about why home prices have risen over the past decade. There are three factors that affect the growth in home prices. One is historically low mortgage interest rates. The second is wage growth and consumer confidence. And the third is limited housing supply. Let's talk about all three of those with a particular emphasis on that third point. But first, to address the first two, historically low mortgage interest rates, I've heard many people say, anecdotally, that they are afraid that if If mortgage interest rates rise, it will trigger a collapse in the housing market.

A fluctuation of a handful of basis points is not enough to trigger a home price collapse. We, both now and over the past decade, have been the recipients of stupidly cheap mortgages. I mean stupidly cheap. Look at what the mortgage interest rates were during the Carter administration. Heck, actually, you know what, don't even bother going back that far. Look at what they were in the early 2000s. In 2002, the average 30-year fixed-rate loan was about 6.5%. And the chief economist at Freddie Mac, a guy by the name of Frank Nottaft, said, quote, 2002 was an amazing year in the housing sector.

The annual average for the 30-year fixed-rate mortgage this year was about 6.5%. the lowest annual average in more than 31 years. He said that on December 26, 2002. So, 2002, mortgage interest rates are 6.5% and we're all collectively celebrating the fact that that's the lowest in 31 years. So the fact that today, and not just today, but over the span of the past decade, ever since the Great Recession, we've been able to get mortgages at the rate of inflation or less. That has had a huge impact on the growth in home prices, and that's not going

to change in 2022 or 2023. Sure, there might be minor fluctuations, but mortgage interest rates are not going to skyrocket back up to 6.5%, 7%, 8%, anytime in the coming years. And we know, based on statements from the Fed, that we can say that with confidence for the years 2022 and 2023. So those historically low mortgage interest rates, which positively affect the growth in home prices, those are here to stay for at least the next two years. Number two, wage growth and consumer confidence. The Freddie Mac report that projected a reversion to the mean of 5.3% growth rate in home prices in the year 2022 spent a lot of time talking about this precise factor. We have a labor shortage across the nation right now. there are more job openings than there are people to fill them.

When that happens, wages grow. When wages grow, people spend. And when people spend, home values go up. So that's the second of three factors that affect the growth in home prices. And that also remains strong and is projected to remain strong through 2022 and 2023. The third factor, limited housing supply. And this is what we're going to spend the most time on. It's critical to understand how limited housing supply, which was a problem that existed pre-pandemic, was exacerbated by the pandemic to such an extent that it drove this massive skyrocketing in home prices during the peak pandemic year.

April 2020 to April 2021. We're talking the month after the shutdown started until the month that the vaccine became ubiquitous. It was that 12-month period that we saw home prices. skyrocket. And that's because the pandemic exacerbated an issue that already existed, which is incredibly limited housing supply. So first, let's discuss how supply and demand are tracked. Housing supply can be tracked by metrics like new construction permits, renovation permits, and the volume of current market listings relative to the pace of sales. That's a metric referred to as months of supply. Because permitting,

is a highly trackable process, and because listings, home sale listings on the MLS, all take place in this database that shows volume of new listings, average days on market, and relationship between initial asking price and final sale price, because all of that is tracked by the MLS. It's quite easy to obtain data related to housing supply. It's a little harder to estimate demand. Supply is a fixed physical object. Demand is a sentiment. And so demand is estimated through the pace of sales, meaning the number of days on market, the volume of homes that are sold at or above asking price, weekly mortgage applications, and web traffic to search portals. Those are an assortment of metrics that analysts use in order to estimate demand. That's not a comprehensive list. There are, are also metrics like population growth, new household formation. At the state level, there's net migration into or out of a given state, depending on which states have the most rapidly growing populations. These are all indicators of demand. In February 2020, before the pandemic,

or at least before the shutdowns, Freddie Mac published a report warning of a severe housing shortage. That's a direct quote, severe housing shortage. And they estimated that the U.S. suffered from a deficiency, a shortfall of 2.5 million homes relative to housing demand. Now, there are several factors that went into this. Number one, in many cities, the cost of construction, the cost per square foot of new construction is prohibitively expensive. Because when you think about the price of a home, there are two components. There's the underlying land, and then there's the structure itself. In an area where the underlying land has a value that is so sufficiently high that you couldn't cheaply build a structure on it without it

just being prohibitively expensive, in those areas, there's a disincentive to build because you can't sell a new construction home for the cost of the land plus the cost of construction, the material and labor cost of creating a new home there. This is, by the way, the reason that we see density in high-cost areas and the reason why multi-unit properties, duplexes, triplexes, fourplexes, are so attractive, particularly in those areas, you're consolidating the use of that underlying land, which, from an investment perspective, is just fixed overhead. As a rental investor, it's the structure that gives you the cash flow, not the underlying land. As a speculator, it's the opposite. That's neither here nor there. To go back to what we

were talking about, one of the factors contributing to the housing shortage is that the cost of new construction is prohibitively expensive in many areas and is not a good investment from a developer's point of view. This factor was severely exacerbated by the pandemic. The shutdowns created pressure in both upstream materials as well as in labor. The labor portion is obvious. Throughout 2020, it was difficult, if not impossible, to get a construction crew physically in person on a site to handle work. Yes, they are essential workers, but many people opted not to,

for health reasons, for safety concerns. many builders didn't want to take on potential liability risk, and so the labor market, which was already crunched, suffered a severe blow as a result of the shutdowns. In addition to that, the upstream materials that go into the construction of a home, such as lumber, copper piping, HVAC systems, asphalt shingle for roofs,

the manufacturing and distribution of these materials were also impacted by the shutdowns, and that created a spike in prices, a huge surge. Lumber in particular, which is a major component in home construction, lumber prices shot up to astronomical rates. And from the point of view of a lumber mill owner,

there's not a lot that they could do to ramp up supply in order to have more to sell at a time when lumber is going for super high prices. I mean, if they could, they would. but in order to be able to mill lumber, you need major capital expenditure investments. A lumber mill is a machine-heavy enterprise, and so the lead time to be able to increase capacity, to be able to increase manufacturing capacity, is years. It doesn't have the elasticity that some other industries have, where less machine-heavy, less capex-heavy industries have greater elasticity in supply.

Lumber does not. And so despite the fact that lumber prices shot up to such jaw-dropping levels, the supply didn't change. It couldn't. It couldn't change that fast. And so what happens if you're a builder? You're already looking at high underlying land values. You're already looking at a labor shortage.

And now you're seeing that the cost of materials has gone berserk. As a builder, you're definitely not going to build under those conditions. And so the housing supply shortage, which already existed for years pre-pandemic, took a rapid and severe turn for the worse after the shutdowns began. And that was a major contributing factor to the fact that housing prices skyrocketed over the aforementioned 12-month period. Now let's contrast this with what happened prior to the Great Recession. During the Great Recession, there was a housing surplus. Yes, home prices were going up, but not because of inherent supply demand fundamentals. Home prices pre-Great recession were going up because of speculation, fueled by easy credit.

And I want to make a distinction here between easy credit versus cheap credit. Cheap credit, which is what we have right now, is when qualified borrowers can borrow money cheaply. Easy credit is when unqualified borrowers can borrow money that they can't afford to pay back. That's the difference between cheap credit and easy credit. And pre-Great recession, we had easy credit flooding into the markets. And speculators were using this cheap credit to rapidly flip homes to other speculators. So you had this high volume of transactions in which flippers would flip homes to other flippers, who would then flip that home to another flipper.

And every time the home changed hands, the price would go up incrementally until prices just rose and rows and rows built on high-volume transactions from speculators who were financing their speculation through easy credit. So that, to pre-Great recession, was a house of cards with no supply-demand fundamentals underpinning it. We had a housing surplus, and yet we also had rapidly growing home prices. that intuitively does not make sense. Why would you have a surplus and prices go up at the same time?

That's the situation that we were in pre-Great recession, and what we're in right now is the opposite. Now we have a shortage, and it absolutely makes sense that when a desired product is in short supply, the price of that product will go up. And do you know, by the way, what is crunching the supply even further right now? it's all of the Wall Street firms that are buying up single family homes. All right, this is a whole new bag of worms.

So we're going to take a break here for a word from our sponsors. And when we come back, we're going to talk about, we're going to continue what we're talking about. We're going to talk about the Wall Street firms that are turning into landlords, which is BT-dubs. One of the reasons why I'm so passionate about getting more mom-and-pop investors, people like you, into being real estate investors, because if we as mom-and-pop landlords, as individual investors aren't buying up homes, then the big Wall Street firms are. And I think it's better for everyone, for you, for me, for the tenants.

It's better for all of us to have small businesses, to have mom and pop investors who own the housing supply. So I'll get off my soapbox. We'll take a word from our sponsors. When we come back, oh, there's so much more to say. See in a second. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared.

Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home. So I got tons of shelving that's in the entryway, in the bathroom. Very space saving.

I have a daybed from them that's more. multi-purpose. You can use it as a couch, but you can sleep on it as a bed. It's got shelving. It's got drawers underneath for storage. But you can get whatever it is you want, no matter your style, no matter your budget. Wayfair has something for everyone. Plus, they have a loyalty program, 5% back on every item across Wayfair's family of brands. Free shipping, members-only sales, and more. Terms apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W. W. W. W. F-A-I-R-com.

Sale ends December 7th. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in-payments technology, built to evolve with your business. Fifth Third Bank has the big bank

muscle to handle payments for businesses of any size. But they also have the FinTech hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments, a fifth third

better. Welcome back. By the way, does anyone remember liar loans? So this was back in the early 2000s, back when the 30-year fixed rate mortgage was 6.5% and everyone was celebrating that like, wow, this is the lowest in 30 years. Back in those days, mortgage rates were high, but this is how easy it was to get a loan. There was this product colloquially referred to as liar loans. The official term was a no-income verification loan, which means that you could just state a number on your mortgage application, assert that that number is your income, and nobody would check it. The underwriters would not verify your income. Can you imagine that today? Underwriting is such a pain in the butt today. It's so strict. Every time you apply for a loan, you're like,

oh man, here's, here's 150 pages of documents, here's my blood type, here's my kidney, here's my firstborn. Today's mortgage underwriters want everything. Less than 20 years ago, if you could fog a mirror, you could get a loan. So anyway, just reminiscing on the days of the and how different it is today. And actually, before we move on to talking about Wall Street buying up the housing surplus, let me stay on this for a second because I've got some additional stats to share with you to emphasize the distinction between cheap credit and easy credit and also to illustrate how different today's borrowers are.

So, prior to the Great Recession, between 70 to 80% of mortgage originations were given to borrowers who had less than excellent credit, defined as a credit. score of 759 or less. The overwhelming majority between 70 to 80% had less than excellent credit. Today, only 33% of mortgage originations are given to borrowers with those same scores, meaning conversely, two-thirds of mortgage originations today go to people with excellent credit. Credit scores of 760 or above. Furthermore, today, more homeowners are mortgage-free.

In 2007, around 68% of homeowners carried a mortgage. In 2020, only 62% of homeowners carried a mortgage. And that gap, 6% gap between 62% versus 68, it may not sound like a lot, but that is significant. When it comes to the security that homeowners have as an aggregate, when it comes to the law of large numbers, the fact that so many more homeowners, today own their homes free and clear indicates strength in the housing market. And the fact that two-thirds of mortgage originations are going to people with excellent credit indicates further strength in the credit market and by extension the housing market. The other thing to talk about right now we're only talking about primary mortgages. Prior to the Great Recession, cash-out refinances were incredibly popular. And unfortunately, they were not just being taken out by investors or business owners, pre-Great recession, people were taking out cash-out refinanced mortgages in order to build a deck, put in a swimming pool, in order to finance

consumer spending. And they did so based on the belief that, well, if home prices are going to keep going up, then why not pour a bunch of money into my primary residence? Hopefully, anyone who has listened to this podcast for any length of time can spot the fundamental flaw in that thinking. And if this is your first time listening to the episode, the brief one-sentence summary of that flaw is that your primary residence is a consumer purchase, whereas your investment properties are investments. So not all home purchases are investments. It depends on the use of the purchase. If you're buying it for your personal use, then it is a personal purchase, a consumer purchase. And that's fine. Smart Financial Management means making smart consumer purchases.

but if you're buying a home for your personal enjoyment, then that home is taking money out of your pocket every month. If you're buying it as an investment, then it is net putting money into your pocket every month. That's the difference. Anyway, back to cash out refinances. Pre-great recession, cash-out refinance loans, which were then spent on personal residences,

were high. After 2008, those loans dropped by 75% and then plateaued at that new normal. This means for more than a decade, we have been a society with a 75% decline in cash-out refi mortgages, which again points to strength in the credit market and the housing market.

On top of that, today's borrowers are taking out smaller loans relative to their income, meaning that they have healthier debt-to-income ratios as compared to the loans taken out pre-great recession. And the rate of delinquency today is far lower than it was pre-great recession, meaning significantly more homeowners are making on-time payments today than they were back then.

And that's true even with the job disruptions of the pandemic. So that strength in the credit markets, that strength in the profile of mortgage borrowers, Those are indicators that the fundamentals of the housing market today are very different than the fundamentals that we experienced during the Great Recession. And as a result, that cognitive bias, the availability heuristic that says, well, back then home prices rose and then they fell, now home prices rose. Doesn't that mean they're going to fall again? It's tempting to think that. The brain wants to think that way, but it is overly simplistic because that line of reasoning discreet.

counts the underlying fundamentals that cause or influence a given behavior in the market. Now, shifting away from borrower profile and onto what we were talking about earlier, which is the housing shortage. One of the factors influencing the housing shortage is that many major Wall Street firms right now are buying up the housing supply, specifically single-family homes, and they're buying these homes in order to turn them into rental properties. These major firms use algorithms to determine which homes to buy. They make offers sight unseen.

They have the funds to be able to make all cash offers at or above asking price, and they're able to close within a few days. So they can play to a competitive strength that most individual homebuyers, mom-and-pop homebuyers, can't compete with. Take a look at the Atlanta market. There's a company, just one of many, called Invitation Homes. It owns 12,000 single-family homes in the Atlanta area, and nationwide, it owns more than 81,000 homes. It uses these homes as rental properties. Now, Invitation

Homes is only one of many examples. There are at least three other major firms, confirmed, that collectively own 100,000 homes in the area, and one of them just announced that they will be spending $5 billion to buy more. And they will be using these homes as buy and hold rentals. This is a deviation from the way that Wall Street hedge funds, institutional investors, this is a major deviation from the way that they used to invest. They used to be in the flipping business because when you flip a home, you take the profits right away and then you can redeploy the cash. And that's very appealing to an institutional investor. So the fact that these big Wall Street firms have shifted from buying homes for the sake of flipping them to buying homes for the sake of holding them,

which is a much more slow profit route, that points to their analysis showing underlying fundamental strength in not just the housing market, but also in rental demand. They are essentially making a bet that more people will be demanding rentals. and that they can make better profits by providing those rentals than they could by any other alternative means of investing in the housing market, such as new construction. Again, this exacerbates the issue of the housing shortage. Not only are major Wall Street firms not backing the development of new construction, and not to say that none of them are doing that, but there's certainly a shift away from that by many major firms. So not only are we not seeing enough new construction, but also these firms are buying up the existing supply. And when you put those two factors together, you have a housing shortage that only continues to get worse. And again, when supply is constricted and demand either stays the same or increases, which it will because people need a place to live, then prices go up.

So what should you do and how can you help? How can you contribute to the solution to the housing crisis? Let's address these two questions, each individually, starting with, So what should you do? If you are already a homeowner, it is, in my view, not prudent to sell your home for the sake of capturing the gain with the assumption that prices in the future will be cheaper than they are today. Now, if you happen to be in a place in your life where you want to downsize, not for financial reasons, but for personal reasons, perhaps your youngest child just graduated from high school and has left the nest and now you just don't need as big of a house as you currently have and it's time for you to downsize. Okay, cool. Great. If that's the case, then sure, you can downsize and capture some of those gains. But you're not doing that for the sake of market timing. You're doing that.

that because this is the point in your life where you would do that anyway. And the fact that you're doing it post this great run-up is just lucky timing for you. But do not expect that you will be able to sell your home, rent for a year or two, and then watch the market crash and buy back your same home at a cheaper price. Antiquotally, I have heard people talk about that. I talk to somebody at a conference recently who had done exactly that. And that is the epitome of market timing. Forecasting what you think might happen in the future and then making a six-figure gamble based on that forecast. That's what market timing is and it doesn't work in stock investing and it doesn't work in housing. Same, same, same. And by the way, let's not forget that there's

a distinction between a forecast and a projection. This is something that we discussed. in the podcast episode with Morgan Housel, which we will link to in the show notes. You can subscribe to the show notes for free at afford anything.com slash show notes. But in that episode, we discussed the distinction between a forecast, which is a prediction that is incredibly specific.

It is time bound, and it is specific. That's a forecast. A projection, which is still just a fancy word for guess, is an educated guess. It's just a fancy word. for an educated guess. A projection says, here's the data, here are the facts, based on what I'm observing, based on the facts and figures laid out in front of me, it's reasonable to project X or to assume Y. But it's not time bound and it's not specific. It's generalized and it's long term.

That's a projection. A projection is an educated guess about what we reasonably think the future, the long-term future will hold. A forecast, by contrast, is when you say, I really think there's going to be a crash. So I'm going to sell my house. I'm going to move into an apartment. And I think I'm going to be back in my house in eight months. That is some scary market timing. It's the equivalent of trying to sell a stock, wait for that stock to drop, and then buy it back. Sometimes it works out. Sometimes you get lucky, but what we know is that people who try to time the market, people who dance in and out of their index funds or their stocks, statistically speaking, tend to do worse than people who buy, hold, stay the course. The housing market is no different.

Over a long-term aggregate average, both stocks and housing tend to go up over time. And the earlier you buy, the more that compounding gains, compounding wealth, works in your favor. So time in the market is more important than timing the market. And by the way, I'm speaking right now to owner occupants who are thinking about selling their personal residence, but if you're an investor or an aspiring investor, the news is even better for you, because that means as an investor, you're buying a volume of deals, which means you get to dollar cost average into the market. If you buy a new home every two years and you do that for a period of 10 years or 12 years, cool. After a decade or a dozen years, you'll have five or six homes and you will

have dollar cost averaged your way into those, which is a beautiful way to not time the market and to deploy your cash as you accrue it. It's a great way to diversify so that your entire retirement isn't beholden to an index fund portfolio alone. Now, to those of you who are currently renters and or those of you who perhaps are homeowners but you want to buy more homes, what should you do? The tip that I just gave out was for people who are currently living in their primary residence and are thinking about selling it in order to capture the gain. And the tip that I gave was don't. So what happens if you're on? the other side of that table and you don't own a home yet or you don't own as many homes as you

would like yet and perhaps you want to buy but you keep getting priced out of the market by these Wall Street firms that are swooping in making all cash offers because they know that it's a good time to buy. How do you compete with Wall Street as an owner-occupant or as a mom-and-pop investor. This is where a bit of creativity in deal finding comes in. So we're going to take one last break for one final word from our sponsors. And then we're going to talk about some off the beaten pathways of finding or creating deals in the world of real estate. All right, welcome back. So how do you find or create deals? And what is the distinction between finding versus creating a deal? We're going to talk about that right now. And I'm going to frame this

in such a way that this applies to anyone who is trying to find a property, regardless of whether it's an investment property or a home for your own personal use and personal enjoyment. So imagine a spectrum, right? Imagine a horizontal line, an X axis with find on one side, on the far left side of the spectrum, and create on the far right side of the spectrum. On the far left side of that spectrum, you have the more conventional methods, of finding a deal, which means you browse Zillow, you contact a real estate agent, you look at properties that are publicly listed on the MLS, the multiple listing service, and you buy the

inventory that's already there, you buy off the rack. That is the conventional way to do it. That's the way that most owner-occupants do it, not because they have to, just because most people don't know any better. And it's certainly the easiest, least time-consuming way to do it. But the trade-off is you don't necessarily find the best deals taking that approach. You do, however, save the most amount of time taking that approach. So if time is in extremely short supply for you, if you have more money than time,

then finding a publicly listed deal is a fitting option for you. Again, because you are trying to preserve not just your money, but also your time, attention, energy focus. But let's move along this spectrum. And let's move towards the create side of the spectrum. On this other side, the far right side of the spectrum where you're creating a deal, you are buying inventory that does not yet exist. You are creating a new deal out of thin air. And because you've created that deal, because you've created that value, you are able to access value that is not available to other people because you made it. So examples of this, there are people in the real estate community who send direct mail campaigns.

They will send snail mail or postcards to all of the out-of-state owners in the 1, 2, 3, 4-5 zip code. And they essentially run a marketing campaign where they contact them multiple times and say via letter or via postcard and say, hey, I notice you're an out-of-state owner. I would be interested in discussing buying your home from you if you've ever thought about something. selling, please let me know. And after four, five, six of these letters or postcards, after a number of cold approaches, leads start to come in. And from that point forward, it's largely a numbers game. Of every X amount of leads that come in, Y percentage of those are worth further investigation. And of that value Y, some quantity Z are worth trying to close the deal. And of that Z quantity of trying to close the deal, there's quantity A of deals that actually close.

So an approach like this, a direct mail campaign is largely a numbers game. But it's one of the more sophisticated methods of deal creation. It's a method that real estate professionals and investors often use. And there's no reason that an owner-occupant couldn't do it for the sake of finding themselves a home. In fact, it's almost easier as an owner-occupant because you're not looking for deal volume, you're just looking for one. You don't have the pressure of trying to get in five good leads every month. So you can take your time and iterate your processes and keep soliciting for the home that ends up being the right one for you. So that's one example on that far right side of

the spectrum of how deals are created. Another example is what's referred to as driving for dollars. And this takes place when a person literally gets in their car or pounds the pavement, pounds the sidewalk with their sneakers, walks a given or drives a given neighborhood, and looks for homes with signs of deferred maintenance, peeling paint, siding that desperately needs a power washing, gutters that are hanging askew, lawns that are overgrown, shrubbery that's overgrown, fences that are hanging off the hinges, all of these signs of deferred maintenance indicate that an owner either doesn't have the money to keep up with the property or just isn't interested in it anymore. And perhaps the owner is hesitant to list the property publicly on the MLS because

they assume that they would have to fix up the property in order to publicly list it. And they don't want to do that. Maybe they don't have the money to. Maybe they just don't want to. Maybe they don't have the time, energy, attention, focus to handle that project right now. So once again, this is where you come in and say, hey, I'm willing to buy your property as is. Let's see if we can work out a deal. and this is yet another example of creating a deal rather than finding one. Now these are just two of multiple tactics, and if these sound quite time-consuming, and I get that, the other thing that you can do is form relationships with people

who are already doing this stuff, because the people who are doing this get more leads than they can reasonably close. In fact, they get more leads than they necessarily even want to follow up on because they have different criteria than you do for what they're looking for, which is different from what you're looking for, so they might come across a lead that's just not in their wheelhouse,

but it's totally in yours. And so if you form relationships with people who are already doing this, then you get the benefit of their effort. And you can toss them a couple grand as a thank you for bringing that year away. That's a drop in the bucket in comparison to the amount of money that you're saving

by not overpaying for a property by virtue of going the standard MLS route. And to be clear, I'm not trashing the standard MLS route. I just bought a duplex in Indianapolis this year in 2021. And I went the standard MLS route. And I know that I paid way more for that duplex than I otherwise would have if I had gone the create a deal route. But I've got other things on my plate. And so to me, paying the convenience surcharge of buying a property that's publicly listed on the market,

That, for me, was a surcharge that I was willing to pay. But again, depends on what you're trying to optimize for, time or money. And I want to be clear, owner-occupants can do this too. There is no law stating that if you want to buy a home for yourself or for your mom or dad or your grandma-grandpa or your sibling, that you couldn't use these same types of deal creation methods. Most retail homebuyers don't even know that these methods exist. and so they don't use them,

but they're perfectly valid tools in the toolbox of anyone who just likes to get a good deal and is willing to do a bit of legwork in order to make that happen. So to the question, how do we compete with all of these major Wall Street firms that are buying up the housing inventory?

The answer, at least in part, is those major Wall Street firms are only buying the inventory that's publicly listed. You can buy off-marked. deals and thus get a much better deal than they can. Because you have flexibility on your side, you can be nimble in a way that these large behemoths cannot. You can exercise judgment, whereas they are purely algorithmically driven. To wrap up and review what we've talked about, is the housing market absolutely bonkers? Yes. Home prices rose 17.2% from April 2020 to April

2021, and that is a huge leap over the 5.8% long-term annualized average that we saw over the previous decade. So absolutely, home prices have gone nuts, but there's a wide analyst consensus that in the year 2022, we will see home prices revert back to their normal rate of growth, approximately 5.x percent. 5.3, 5.3 is what Freddie Macs. says there are other analysts who have slightly different predictions, but they're all within that range. There is no evidence, no compelling evidence, that there will be a housing crash, and the underlying fundamentals of low supply coupled with increasing demand on top of a credit landscape in which we have fewer borrowers who are more highly qualified, who have, on the whole,

primary loans rather than a big heap of second loans, and who have healthier debt-to-income ratios and lower delinquencies, all of those metrics create compelling evidence that a crash is unlikely. We are also seeing major investors, data-driven investors, such as big Wall Street firms, choose this moment to get in the game and buy up residential real estate for use as long-term buy-and-hold rentals. And given the current land, It is absolutely the case that many people who are trying to enter the market for the first time are struggling to be able to afford their starter home. If you're entering the market as a primary resident as an owner-occupant, you might have

to cough up a lot more than you thought you would. And so in order to find a good deal, you can use some of the same tactics that sophisticated investors use. And if you're just trying to find a home for yourself, it might actually be even easier for you because you're not looking for deal flow, you're not looking for volume, you only need one home. And it's much easier to find one home per year or one home per every few years than it is to reliably source deals at volume, which is what a lot of the bigger investors, even the bigger mom and pop investors are trying to do. So if you are trying to buy a home for

yourself as an owner-occupant, or if you are a beginner mom and pop investor with aspirations of a single digit number of units in your portfolio, you've actually got a better setup than a lot of people. You can take your time, you can be patient, and you can create the right deal. So that's the wrap up of everything that we've talked about. We have a course on rental property investing. It's called Your First Rental Property. I painstakingly built this course over the span of three years. it went through two rounds of beta. It was incredibly well researched. We did a lot of testing and iterating

to make sure that we were presenting a comprehensive, systematic framework that could help our students transform from being brand new to this landscape to being confident, knowledgeable, and ethical investors. Within the course, we teach you how to analyze properties for their profit potential and how properties create wealth in the first place. It's not just cash flow. That's the tip of the

iceberg. We teach you how to truly understand the many ways that rental properties create compounding wealth and how to compare different properties against one another so that you're making a sound decision rooted in spreadsheets rooted in rigorous analysis. You're not just flying by the seat of your pants and making a hunch. So we start you off with the analyzing module. Then we into the finding module where you learn all about that spectrum of finding a deal to creating a deal and all of the sophisticated tactics that people use in order to create better deals for themselves. We take you into financing where you learn the financing landscape, both institutional lending as well as more creative forms of borrowing. And we don't just give you

the facts. We walk you through how to exercise judgment, how to think through the risks of each option, the pros and the cons, how to weigh that and how to weigh that within the broader context of your life, your career, your family, your other risk factors. We talk about how to think through renovations at a strategic level, the scale between feasible and optimal, so that you are neither over-improving a property nor letting its potential go to waste. We talk about how to negotiate for a property. The multiple times within the process when you can negotiate with the seller and the multiple ways in which you can do so. We walk you through actually buying the property.

What is the process? Particularly if you're a newbie. We've got students who, this isn't just their first rental property, it's their first property, period. We walk you through the complexities of closing the deal. And then we talk about how to build your team, particularly if you're an out-of-state investor, you're building your team long distance. We walk you through how to find a great real estate agent, a property manager, contractors, an electrician, a plumber.

How do you build that team, especially from out of state or out of country? What red flags do you look out for? We give you word for words scripts that you can copy paste and stick into an email or that you can speak on the phone when you're making these phone calls. We give you checklists of things to look for. We give you a list of red flags to watch for. All of these resources, we have more than 50 resources in the course, checklists, spreadsheets, worksheets, fill in the blanks. It's highly interactive.

And we have TA's, teachers assistants, who are six out of seven of them are alumni from the course. The one who's not as Rich Carey, he's been a guest on this podcast a bunch of times. But the other six out of seven are all successful alumni who graduated from the course, became successful rental property investors, and now serve as TAs in the course. lead our study halls where they will walk you through a lot of these interactive worksheets so that you can figure out how real estate fits into your life and your portfolio. We have active investor mastermind calls where if you are in the doing phase, you know, there's a learning phase, there's a doing phase. If you are actively in that doing phase,

if you're making offers, if you're getting inspections, you can have a mastermind call with other people who are also in that active phase. We have office hours. We have office hours. We have live Zoom calls with me at the end of every module to make sure that I answer all of your questions about the material that we've covered. We have robust forums where you can network with other investors. And we custom-built software. It's called Rental City Search. We custom-built this software that allows boots-on-the-ground investors in various cities across America. You know, if you're in Wichita, Kansas, or Indianapolis, or Cincinnati, or Dayton.

or St. Louis or Moline, Illinois, if you either live there or you have lived there or you're knowledgeable about it or you invest there, you can connect with other people who either already invest there or are interested in doing so. It's a way that out-of-state investors can connect with people who have local knowledge about a given area so that you can learn not just whether you should invest in that city, but specifically what neighborhoods, what streets, what is that hyper-local knowledge that you're missing, this tool, this custom software that we built, we eventually plan to open it up to the general public. But right now, it is only accessible to students and alumni from your first rental property. And when I say students and alumni,

I want to emphasize when you become part of the YFRP family, your first rental property, YFRP, once you join, you're in for life. This is a lifetime resource that you can refer back to any time you want. So years from now, if you're interviewing property managers and you're like, you know what, I want a word for word script that I can copy paste into an email, it uses a canned response, and I want an accompanying script that I can say on the phone when I'm placing calls, and I want a checklist of what I'm supposed to ask them. If five years from now you want that, all you got to do is log back into the course and boom, get it, it's yours. It's all right there in the toolbox, we have a robust

tool box of the most sought after resources that will streamline your systems and give you a systematic, organized step-by-step map and set of tools that are built for your success as a rental property investor. Now, this course, we're closing our doors

on Thursday, October 14, 2021. If you are interested in getting lifetime access you've got from now until Thursday. After that, we close our doors so that we can turn our full attention to the students. Now, if you would like to learn more, if you'd like to see inside the course, if you'd like to watch videos, if you'd like to live chat with someone from our team and ask questions directly, go to affordanything.com slash enroll. That's afford anything.com slash enroll. I hope you join. And if you do, I'll see you in class. Thank you so much for tuning in.

My name is Paula Pant. This is the Afford Anything podcast. I'll see you in class. And if not, then I will catch you in the next episode.